A sea change has been witnessed in the functioning of the Defence Ministry for some time, now. The best reflection of the changed environment is the new Defence Procurement Procedure (DPP) 2016. Brig Sunil Gokhale analyses the new parameters that DPP 2016 enunciates and is of the opinion that the Indian Defence Industry has a level playing field now to conduct its business now. There are improvements possible and unfinished jobs yet like defining the Strategic Partnership model. Hopefully, these will be addressed, shortly. The author sums up his assessments by suggesting catalysts to boost defence production.
Make In India – Defence Manufacturing: How Defence Procurement Policy (DPP) 2016 Helps
Speaking at an event organised by the ASSOCHAM in May 2015, the former President of India Dr Abdul Kalam, Bharat Ratna, had spelled out a vision for an Indian Military Industry Complex (MIC), which would not only be capable to meet India’s requirements of weapon systems but also attain world class standards, thus putting it in the league of major arms exporter nations.
Recent Policy Measures to Promote Defence Industry
The BJP-led NDA government which came to power in May 2014, apparently endorses the late President’s vision and is actively pursuing it as evidenced by a slew of policy measures announced and implemented so far. Some of the most striking ones being:
- Raising the foreign direct investment (FDI) limit in the defence sector to 49 %, from the earlier 26 %, as also easing the procedure by allowing FDI up to 49 % under the automatic route and beyond that through the Foreign Investment Promotion Board’s approval. The government also did away with the earlier requirement of mandatory permission from the Cabinet Committee on Security (CCS) beyond 49 %.
- Simplifying the procedure for grant of industrial licenses, as also increasing the validity period of industrial licenses for the defence sector industries, by raising it to15 years, from the earlier seven years period, which is further extendable to 18 years from the earlier extendable limit of 10 years.
- Creating an even playing field for the private and public sector, by also extending allowance for Exchange Rate Variation (ERV) to the private sector, making all Indian industries (public and private) subject to the same kind of excise and custom duty levies. Further, the private sector industry can also receive ‘Maintenance Transfer of Technology (MToT)’ in ‘Buy (Global)’ cases.
- Preference to Buy Indian–Indigenously Designed, Developed and Manufactured- categorised as ‘Buy (Indian-IDDM), ‘Buy (Indian)’, ‘Buy & Make (Indian)’ & ‘Make’ categories of acquisition over ‘Buy (Global)’ category, thereby giving preference to Indian industry in procurement.
- Defence Exports Strategy has been formulated and is put in public domain. The Standard Operating Procedure for issuing NOC for export of military stores has been simplified and the process for issuing NOC has been made online.
Make in India & DPP 2016
While the above measures are basically supportive in nature, two other enabling initiatives of the government reflect major attitudinal changes of the government leadership and the bureaucracy towards industrial development. In tandem, these will help accelerate the build up of the Indian MIC like never before. These changes are, firstly, making defence manufacturing the prime driver in the ‘Make in India’ initiative to transform India into a manufacturing powerhouse, with an ambitious target of increasing the share of manufacturing output from the current 16 % to 25 % of GDP by 2025. Secondly, the release of the latest version of the DPP 2016 on 30 March 2016, applicable with effect 01 April 2016, which has been tailored to boost the government’s ‘Make in India’ initiative in the defence sector. It also improves the defence procurement process in order to make it more efficient and accountable towards meeting the needs of the armed forces. DPP 2016 is as yet a work in progress, certain important aspects such as a new chapter on the Strategic Partners, and a few appendices and annexure are yet to be notified. Among the many changes incorporated in DPP 2016 so far, two of the changes likely to initiate a paradigm shift in promoting indigenous manufacturing are as follows:
- Introduction of a New Procurement Category: Addition of a new category called ‘Buy (Indian-IDDM)’ and placed on the top of the existing five, arranged in a decreasing order of priority: ‘Buy (Indian)’, ‘Buy and Make (Indian)’, ‘Make’, ‘Buy and Make’, and ‘Buy (Global)’. The products to be procured under Buy (Indian-IDDM) category will be required to have a minimum of 40 per cent indigenous content if these are designed, developed and manufactured indigenously. If the product is not designed and developed indigenously, it will be required to have a minimum of 60 per cent indigenous content. The intent thus is clearly to promote in-house design capacity (thus creating Indian IPR) and promote indigenous manufacturing, the two critical aspects, which, would lead to a robust growth in the capability, efficiency and output of India’s MIC and take the nation closer to the goal of self-reliance.
- Revamping the Make Category: Worryingly, the ‘Make’ category notified nearly a decade ago has been a failure, with not even a single successful project having fructified to date. The revamped Make Category has two sub categories, ‘Make I’, these comprise projects with a development period exceeding three years involving large investments, and hence are government funded. ‘Make II’ are relatively minor projects with smaller gestation periods, and hence Industry funded. Products which are developed successfully through the Make procedure will be subsequently procured as Buy (Indian-IDDM) or Buy (Indian). Based on the lessons drawn from the failure of the earlier ‘Make’ procedure, the following important changes have been incorporated:-
- Delineating Responsibility and Fostering a Sense of Ownership: Taking a leaf out of the Indian Navy’s achievements, where the navy has demonstrated its expertise in designing and successfully building all type of battle ships, to include an aircraft carrier and a nuclear submarine, Service Head Quarters (SHQ) would now be entrusted with the task of identifying potential ‘Make’ projects and undertaking feasibility studies for each identified project in consultation with other stakeholders. Each SHQ is to now establish a permanent Make-Project Management Unit (Make-PMU) will comprise of a two star serving officer at the helm with specialist officers from various branches and as members. The Make-PMU will provide the core of the Integrated Project Management Team (IPMT) which will be responsible to oversee a ‘Make’ project right from its inception to successful culmination.
- Encouraging Industries to Enter Defence Sector: Funding of projects under Make I category by the MoD has been increased from 80 to 90%. The balance 10 per cent will also be reimbursed, if the RFP for the product is not issued within two years of the successful development of the prototype. The development agencies will also be able to get a mobilisation advance of 20 per cent of the estimated cost of development. Self-funded projects undertaken in the Make II category by Indian industry will also result in the entire cost of development being reimbursed by the MoD, if the RFP is not issued within two years of the successful development of the prototype. A system of designating certain private sector companies as ‘Strategic Partners’ based on their proven capability, reputation and financial standing is under finalisation. This will help strengthen and widen the national defence manufacturing base as also enhance the retention of skills in defence manufacturing.
- Inbuilt Flexibility: While DPP 2016 has enhanced the indigenous content requirement under the existing ‘Buy (Indian)’ category from the earlier 30 per cent to 40 % and maintained the status quo of 50% on the Buy and Make (Indian) category, yet it has incorporated a provision which empowers the categorisation committees to lower or enhance the indigenous content percentage based on the merits of the case, this will enable the industry to sprout roots in sectors which require special attention and nurturing, e.g., the aeronautics sector, where even Indian designed aircraft like the HTT 40 or the Tejas have more than 70 % imported content, this could be progressively reduced once indigenous vendors come forward on placement of large production orders.
- Clarity in Future Requirements: Technology and Perspective Plan (TPCR), which was criticised at its unveiling in 2013 for being too vague, will henceforth project specific requirements in type and quantity of equipment for a period of 15 years.
Ministry of Defence, several other ministries and industry associations will be involved in planning and executing the ‘Make in India and the DPP 2016’. To achieve synergy and ensure success, a great deal of attention, oversight and nurturing will be required. At present there is no central overarching authority which can provide the necessary coordination and direction. Consequentially, an empowered inter-ministerial working group, termed as the ‘Defence Technology & Manufacturing Commission’ headed by the Defence Minister needs to be established. Besides this, the long delayed appointment of a Chief of Defence Staff will ensure judicious prioritisation and curb inter service friction in procurement issues. Similarly, in order to significantly improve the productivity and quality of Defence Public Sector Units and Ordnance Factories, the Vijay Kelkar Committee report also needs to be implemented without any further delay.
While the DPP 2016 has been welcomed by the industry and the three service chiefs, the proposal for nomination of ‘Strategic Partners’ has been opposed by some private sector companies as they fear losing out to their peers who are already established players in defence manufacturing. Employee unions in the government run defence industries are also echoing their concern, as they are apprehensive of being pitted against the private sector on a level playing field. Under these circumstances, proving the naysayers wrong by taking quick decisions for executing the projects under the ‘Buy (Indian-IDDM)’, ‘Buy (Indian)’, ‘Buy and Make Indian’ and ‘Make’ categories will be critical to the success of ‘Make in India – Defence Manufacturing’.
Brig Sunil Gokhale (Retired)
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of BharatShakti.in)